Turbulent cascades in foreign exchange markets (2024)

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Abstract Access options Additional access options: Similar content being viewed by others The excess volatility puzzle explained by financial noise amplification from endogenous feedbacks Collective dynamics of stock market efficiency Flickering in Information Spreading Precedes Critical Transitions in Financial Markets References Author information Authors and Affiliations Rights and permissions About this article Cite this article This article is cited by Pattern formation by turbulent cascades Universal equation of state for wave turbulence in a quantum gas Detecting correlations and triangular arbitrage opportunities in the Forex by means of multifractal detrended cross-correlations analysis The prevalence of chaotic dynamics in games with many players Multiplicative random cascades with additional stochastic process in financial markets Comments FAQs
  • Letter
  • Published:
  • S. Ghashghaie1,
  • W. Breymann2,
  • J. Peinke3,
  • P. Talkner4 &
  • …
  • Y. Dodge5

Nature volume381,pages 767–770 (1996)Cite this article

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Abstract

THE availability of high-frequency data for financial markets has made it possible to study market dynamics on timescales of less than a day1. For foreign exchange (FX) rates Müller et al.2 have shown that there is a net flow of information from long to short timescales: the behaviour of long-term traders (who watch the markets only from time to time) influences the behaviour of short-term traders (who watch the markets continuously). Motivated by this hierarchical feature, we have studied FX market dynamics in more detail, and report here an analogy between these dynamics and hydrodynamic turbulence3–8. Specifically, the relationship between the probability density of FX price changes (δx) and the time delay (δt) (Fig. la) is much the same as the relationship between the probability density of the velocity differences (δv) of two points in a turbulent flow and their spatial separation δr (Fig. 1b). Guided by this similarity we claim that there is an information cascade in FX market dynamics that corresponds to the energy cascade in hydrodynamic turbulence. On the basis of this analogy we can now rationalize the statistics of FX price differences at different time delays, which is important for, for example, option pricing. The analogy also provides a conceptual framework for understanding the short-term dynamics of speculative markets.

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Turbulent cascades in foreign exchange markets (1)

The excess volatility puzzle explained by financial noise amplification from endogenous feedbacks

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Alexander Wehrli & Didier Sornette

Turbulent cascades in foreign exchange markets (2)

Collective dynamics of stock market efficiency

Article Open access 15 December 2020

Luiz G. A. Alves, Higor Y. D. Sigaki, … Haroldo V. Ribeiro

Turbulent cascades in foreign exchange markets (3)

Flickering in Information Spreading Precedes Critical Transitions in Financial Markets

Article Open access 05 April 2019

Hayette Gatfaoui & Philippe de Peretti

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Authors and Affiliations

  1. Fürstensteinerstrasse 4, 4053, Basel, Switzerland

    S. Ghashghaie

  2. Institute für Physik der Universität Basel, 4056, Basel, Switzerland

    W. Breymann

  3. Experimentalphysik II, Universität Bayreuth, 95440, Bayreuth, Germany

    J. Peinke

  4. Paul Scherrer Institut, 5232, Villigen, Switzerland

    P. Talkner

  5. Groupe de Statistiques, Université de Neuchâtel, 2000, Neuchâtel, Switzerland

    Y. Dodge

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  1. S. Ghashghaie

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  2. W. Breymann

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  3. J. Peinke

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  4. P. Talkner

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  5. Y. Dodge

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Ghashghaie, S., Breymann, W., Peinke, J. et al. Turbulent cascades in foreign exchange markets. Nature 381, 767–770 (1996). https://doi.org/10.1038/381767a0

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Turbulent cascades in foreign exchange markets (2024)

FAQs

What is the foreign exchange market summary? ›

The foreign exchange market is an over-the-counter global market where the buying and selling of global currencies occur, determining their exchange rates.

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What is the significance of the foreign exchange market? ›

The forex market plays a critical role in facilitating international trade and investment, as well as providing opportunities for individuals and institutions to profit from fluctuations in currency values. The forex market operates 24 hours a day, 5 days a week, with trading volumes exceeding $6 trillion per day.

Find Out More ›
What is the equilibrium in the foreign exchange market? ›

The equilibrium exchange rate is the interaction of the supply of a currency and the demand for a currency. As in any market, the foreign exchange market will be in equilibrium when the quantity supplied of a currency is equal to the quantity demanded of a currency.

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What is an example of a foreign exchange market? ›

The foreign exchange market is the market in which foreign currency—such as the yen or euro or pound—is traded for domestic currency—for example, the U.S. dollar.

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How does foreign exchange affect the economy? ›

The exchange rate affects the real economy most directly through changes in the demand for exports and imports. A real depreciation of the domestic currency makes exports more competitive abroad and imports less competitive domestically, thereby increasing demand for domestically produced goods.

Continue Reading ›
What are the two main functions of the foreign exchange market? ›

The main functions of the market are to (1) facilitate currency conversion, (2) provide instruments to manage foreign exchange risk (such as forward exchange), and (3) allow investors to speculate in the market for profit.

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What does the foreign exchange market affect? ›

What Are Foreign Currency Effects? Foreign currency effects are gains or losses on foreign investments due to changes in the relative value of assets denominated in a foreign currency. A rising domestic currency means foreign investments will have lower returns when converted back to the local currency.

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What is the conclusion of the foreign exchange rate? ›

Conclusion. In conclusion, the exchange rate represents the value at which one currency can be converted into another. While many exchange rates fluctuate based on market dynamics, some remain fixed according to specific countries.

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What are the advantages and disadvantages of the foreign exchange market? ›

Forex trading offers several advantages over other markets, such as flexibility with types of contracts and 24 hours a day trading for five days a week. It also allows investors to leverage their trades by 20 to 30 times, which can magnify gains. On the downside, this leverage can also lead to major losses fast.

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What is the equilibrium point in a foreign exchange market? ›

Equilibrium in the Foreign Exchange Market denotes that point where demand for a currency equals its supply.

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Who participates in the foreign exchange market? ›

They can be central banks, governments, institutions, investors or tourists exchanging currency for international travel. Only financial institutions and large multinational corporations participate in the foreign exchange market.

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What happens when a market is in equilibrium? ›

At the equilibrium price, there is no shortage or surplus: The quantity of the good that buyers are willing to buy equals the quantity that sellers are willing to sell. Buyers can buy the quantity they want to buy at the market price, and sellers can sell the quantity they want to sell at the market price.

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What is the most common foreign exchange market? ›

The US dollar is by far the most traded currency in the forex market, with a global daily average trading volume of about $6.6 trillion. In fact, USD takes such a large precedent in forex markets that all 'major' currency pairs in foreign exchange trading include the dollar.

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What are the three types of foreign exchange market? ›

The three main types of foreign exchange market include- futures, spot and forward forex markets.

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What is foreign exchange in simple terms? ›

Foreign exchange, or forex, is the conversion of one country's currency into another. In a free economy, a country's currency is valued according to the laws of supply and demand. In other words, a currency's value can be pegged to another country's currency, such as the U.S. dollar, or even to a basket of currencies.

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What is the foreign market in simple terms? ›

Foreign markets are any markets outside of a company's own country. Selling in foreign markets involves dealing with different languages, cultures, laws, rules, regulations and requirements. Companies looking to enter a new market need to carefully research the potential opportunity and create a market entry strategy.

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What is a summary of foreign exchange risk? ›

Foreign exchange risk is the chance that a company will lose money on international trade because of currency fluctuations. Also known as currency risk, FX risk and exchange rate risk, it describes the possibility that an investment's value may decrease due to changes in the relative value of the involved currencies.

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What is the explanation of market exchange? ›

Definition of Market Exchange

(noun) An economic system in which goods and services are produced, distributed, and exchanged by the forces of price, supply, and demand.

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